'We need a new way': Bank of England strategy head pushes for Digital Pound

The Digital Pound offers the UK a new way of providing digital money without the same risks faced under the current monetary system, which is also largely digital, said the Bank of England's head of strategy and architecture William Lovell.

Why is a Digital Pound needed when we already have bank accounts, debit cards and payment apps? Those mediums are a “wrapper on the payment system,” Lovell said, where “you’re moving liabilities from the balance sheet of one bank to another bank.”

“Now there's nothing wrong with that. It works very well for most people most of the time. But banks are not without risk. And if you have your entire payment system effectively with people depending on that risk, being exposed to that risk, then you have this private sector layer between ordinary people and the central bank. And the central bank has the mission of monetary stability and financial stability,” he added.

“So we need a new way," Lovell said. "As the way that people pay changes, that profile of risks changes, and the things that we need to do as a central bank changes.”

Lovell made the remarks in a webinar titled “Demystifying the Digital Pound,” presented by the Digital Pound Foundation and The Payments Association yesterday. Lovell echoed assurances made by a UK minister in January that a Digital Pound would not create a “surveillance state.”

The Digital Pound Foundation was set up in 2021 to promote a UK CBDC. The Payments Association is a membership community of payments professionals.

Safeguarding personal data

Lovell emphasized the UK’s focus on creating a CBDC for retail payments, designed for ordinary people for everyday spending. It would be a “digital equivalent of a banknote,” he said. “Ten pounds of CBDC will be like a ten-pound note.“ As we're seeing the use of cash declining in the UK, we think it's really important to give people that option.”

Lovell also said the BoE was collaborating with the Bank of Canada to enable offline payments for the CBDC and expects future adoption of a Digital Pound to follow a similar very slow pattern to the UK’s faster payments instant bank transfers and contactless card payments, before taking off.

In terms of data collection, neither the Bank of England (BoE) nor the UK government will have access to personal user data connected to its proposed central bank digital currency (CBDC), Lovell said.

Instead, the central bank wants to run the underlying ledger, leaving banks and technology companies to handle Know Your Customer (KYC) and Anti-Money Laundering (AML) checks while running front-end services connected to the Digital Pound. 

However, the CBDC will not be completely anonymous to prevent financial crimes, and users can adjust their privacy preferences according to their needs. For example, by providing more data to access more services.

Opening up the financial system

Central to the BofE's strategy is a “platform model.” Under the model, the BofE will be responsible for operating the underlying ledger that records transactions and account balances, similar to its role in printing physical banknotes, Lovell said.

Users will access the CBDC via a new type of entity called Payment Infrastructure Service Providers (PISPs), allowing for a range of wallets with different products and services. “PISPs will provide people with wallets that allow them to access their CBDC and other features,” Lovell said. Form factors could range from smartphone apps to smart cards, Lovell added.

Banks are likely to become PISPs but also technology companies because “the PISPs aren't exposed to the deposit-taking and the credit risks that an ordinary bank might be. So it actually opens up a broader spectrum of people who might become involved in this ecosystem,” he added.

It wouldn’t remove the need for bank accounts, as banks offer other services like credit and loans, and the BoE wouldn’t be involved in that, Lovell said.

Bank run risk

Referencing the collapse of Silicon Valley Bank in April, partly due to an exodus of deposits, Lovell acknowledged concerns about the possibility of quick, large-scale withdrawals from banks in case of trouble, potentially heightened by the frictionless nature of CBDC transactions. 

To mitigate this risk, he suggested implementing holding limits for the Digital Pound based on average income levels, providing some control over the volume of funds individuals can hold digitally. Lovell said there were three limits the BoE is looking at in its consultation: £5,000, £10,000 and £20,000.

The BoE’s consultation on the Digital Pound began in February and will close at the end of this month. It has tens of thousands of submissions, according to Lovell, and a summary publication will follow. 

Over the next two years, the BofE will undertake more development work and public communication on the Digital Pound model before making a final decision on roll-out in combination with the UK Treasury.